China's Booming Car Market Defies Pundits
China's car crazy consumers continue to defy expectations in 2006. Earlier this year, most forecasters expected moderate growth in passenger car sales on the mainland, given the arrival of higher consumption taxes on big-engine cars, rising gas prices, and tighter bank lending as Beijing tries to cool off an overheated economy.
Yet while sales growth has tempered a bit in recent months, this year is shaping up to be anything but a sales stall for foreign and Chinese auto makers. First-half passenger car sales clocked nearly 50% growth over the year-ago period, according to the China Association of Automobile Manufacturers.
And total vehicle sales—passenger cars plus trucks and commercial vehicles—could finish the year up 74% or about 6.9 million units over 2005, the group is forecasting. "We are going to see huge growth in a huge market," says David Thomas, vice-president for distribution operations, Ford Motor (F) China, based in Shanghai.
The rollicking good times come from a confluence of factors. First, years of price declines plus rising incomes are making cars an affordable purchase for a big chunk of the public, particularly in big interior mainland markets, says Yale Zhang, a Shanghai-based analyst with auto consulting firm CSM Worldwide. "The real demand is coming from second-tier cities" such as Chengdu and Chongqing and not just rich coastal markets such as Beijing, Shanghai, and Guangzhou. "Common people are starting to buy cars."
To understand why, consider this: The average price for an entry-level compact, which ranges from $8,000 to $16,000 in China, has fallen by 28% since 2000 through the end of 2005, while other categories are off by more than 20%, according to data generated by J.D. Power, which like BusinessWeek is a unit of McGraw-Hill (MHP).
At the same time, China's rapidly expanding national wealth—personal savings hit a record $1.7 trillion at the end of 2005—is widening the pool of potential buyers. An estimated 100 million Chinese families now each have savings in excess of $7,500, according to China's Union of National Passenger Car Market Information.
On top of that, China's legion of first-time buyers faces a huge array of model choices. Consumers are able to select from about 25 entry-level compacts such as the Chery QQ and Honda Motor's (HMC) Fit. According to Zhang's calculations, some 18 new models of all types were rolled out by big foreign and local auto makers in the first half—and another 26 will arrive by year-end. "This is a record year in China's automotive history" for new product launches, he points out.
Nor have efforts by the Chinese government to rein in bank lending to temper the mainland's white hot economic growth had much of an impact on car demand. After all, about 89% of middle-class Chinese surveyed by J.D. Power in 2005 paid in cash. That's not to say that they aren't demanding consumers. They typically spend more than a year's income for even a low-end car, so the financial stakes are exceedingly high (see BusinessWeek.com, 5/17/06, “What Drives Chinese Consumers”).
For the moment, foreign auto makers such as General Motors (GM ), Ford, Volkswagen, Toyota (TM), and Nissan (NSANY )—all of which are joint ventures with local Chinese partners—enjoy a dominating 80% of the domestic market. They have more compacts, sedans, and luxury nameplates in Chinese showrooms and plenty of marketing muscle. And foreign cars still enjoy a perceived edge in quality over local brands, all things considered.
The strong Chinese demand is providing a much needed lift to U.S. auto makers such as GM and Ford who are facing mega-problems with their critical U.S. market, now under a market-share assault from Japanese rivals. GM and its joint ventures in mainland China turned in record growth in the first half with a 47% jump in sales to 453,832 vehicles.
That has enabled GM to secure a market-leading share (it displaced Volkswagen last year) of 12.5% of the total Chinese car market, vs. 10.8% this time last year. Shanghai GM, GM's flagship joint venture in China with Shanghai Automotive Industry (SAIC), is enjoying robust sales with such models as the Excelle sedan and Buick GL8 executive wagon.
Meanwhile, Ford, a relative latecomer to the Chinese market, now is the fastest growing brand in the mainland market, says David Thomas. Its portfolio of brands (Ford, Lincoln, Volvo, Jaguar, and Land Rover) turned in 101.8% growth in the first half, though from a smaller base of 74,395 units. Its key joint venture, called Changan Ford Mazda, produces the hot-selling Ford Focus, a mid-size passenger car, as well as the Ford Mondeo.
Thomas says the compact or small sedan segment remains a huge driver of industry sales, though Chinese consumers definitely "have a growing demand for added functionality and flexibility." Ford is placing high hopes on a five-door version of the Focus it will launch later in 2006.
Another pleasant surprise is that foreign auto makers' profit margins have held up relatively well this year, despite the deluge of product offerings and heavy price discounting. One reason is that overseas manufacturers have lowered their production costs in recent years by expanding their mainland-based auto parts supply networks, thus dodging the steep tariffs China imposes on imported components.
"Over the past two years and after cost cutting, profit margins are getting better this year" among major foreign and Chinese auto makers, says CSM's Zhang.
Of course, China's auto industry still faces a huge over-capacity gap. With the price of fuel rising, sales of gas-guzzling sport-utility vehicles are under pressure and the possibility of a boom-bust scenario with the larger Chinese economy could spoil the industry's joy ride going forward. Yet for now it looks like the mainland auto industry will defy earlier predictions of a less-than-stellar year.